Misunderstanding the Free Market

I have heard a number of people claiming that the recent financial collapse shows that "capitalism doesn't work" and that it "proves we need more regulation". I couldn't disagree more. There was already loads of regulation in place. Economist Walter Williams on the subject (Hat tip to Carpe Diem):

The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans. They were forced to by the heavy hand of government. The solution is not a taxpayer-financed bailout. The solution is to let them fail and allow the people who invested in them, as well as the people who purchased homes they couldn't afford, suffer the losses. Of course that takes a level of political courage that is in short supply.

Edit:
Here's more great stuff from Coyote Blog.